ECB Preview - March 2021: Rising Yields and The ECBs Reaction Function

Rising Yields and The ECBs Reaction Function

• The ECB is unlikely to make any material changes to the monetary policy stance at the March meeting.
• However, this meeting will be closely watched for indications of how the ECB will respond to the recent rise in nominal yields.
• Given the divergence of views within the GC on the nature and drivers of the bond sell-off, it may still be too early for the ECB to clarify exactly what it means by 'favourable financing conditions' and how it will preserve them, let alone devise an immediate policy response.
• Our best guess is that the flexibility of the PEPP will be used to counter any subsequent disorderly EGB selling in the short term, giving the ECB time to formulate a strategy for dealing with a further rise in yields.
• A shift towards formally targeting a pre-defined measure of financial conditions, at a specific level, would be likely in the event of a sustained tightening of financial conditions that advances ahead of the economic recovery.

For the full publication please see:

ECB Preview March 2021.pdf